SCMHRD

The Future of the Power Sector

 The electricity sector in India is predominantly controlled by Government of India's

public sector undertakings (PSUs) but the private sector is also catching up fast.

 India is world's 6th largest energy consumer, accounting for 3.4% of global energy consumption. Due to India's economic rise, the demand for energy has grown at an average of 3.6% per annum over the past 30 years. In March 2009, the installed power generation capacity of India stood at 147,000 MW while the per capita power consumption stood at 612 kWH. The country's annual power production increased from about 190 billion kWH in 1986 to more than 680 billion kWH in 2006.

 India faces a serious shortfall in power generation. During the tenth plan, only 23,000 MW of capacity was added against the original target of 41,000 MW. During the 11th plan, a target of 78,000 MW has been set.

 Anil Kakodkar, Chairman, Atomic Energy Commission, India had estimated that the per capita electricity generation would reach about 5300 kWh per year in the year 2052 and total about 8000 TWh.

 The Government of India has an ambitious mission of „POWER FOR ALL‟ BY 2012. This mission would require that the installed generation capacity should be at least 200,000 MW by 2012 from the present level of 144,564.97 MW. Power requirement will double by 2020 to 400,000MW.

 The ratio of energy generation and GDP growth should be 1:1. The growth in electricity consumption over the past decade has been slower than the GDP‟s growth. This could be due to high growth of the services sector or it could reflect improving efficiency of electricity use. Moreover, captive generation has also increased. However, as growth in the manufacturing sector picks up, the demand for power is also expected to increase at a faster rate.

 A new era of power on power competition will emerge by 2014 that will bring in at least 80-85 GW of new capacity - 80- 90% of them thermal units targeting high PLF of 80-95% - reducing the base load deficit to a low of 1-2%. Accordingly, we expect pricing pressures in the generation space and a 40-50% decline in average short term/merchant prices by 2014-15.

 Renewable sources of energy and nuclear energy which are clean sources of energy usage is on the upswing and would contribute heavily in the times to come.

3 The Future of Power Sector in India The Future of the Power Sector in India

1.IntroductionPower as such is not traded as a commodity and is the most essential ingredient to provide themost critical infrastructure for all other sectors to work. The Power generation in India hasconstantly grown to 150,323 mw as on June, 2009. But this is not even comparable in anystandard with per capita consumption of world average of 2,300 Kwh.

The growth in electricity consumption over the past decade has been slower than the GDP‟sgrowth. This could be due to high growth of the services sector or it could reflect improvingefficiency of electricity use. Moreover, captive generation has also increased. However, asgrowth in the manufacturing sector picks up, the demand for power is also expected toincrease at a faster rate. Demand will also increase along with electrification. The powergeneration capacity has to grow by at least 10 percent to sustain the current GDP growth of 9percent, say industry experts. Ideally, they say, the ratio of energy generation and GDPgrowth should be 1:1.

A World Energy Council report has indicated that 44% of Indian household does not haveelectricity connection at all and nearly 90% of rural habitations rely on forest woods forprimary energy.

The prime force of energy generation in India is through thermal generation including gaswhich accounts for 70% of total generation. Nuclear energy constitutes only 2.4% and 26% isthrough hydel power. India is highly dependent and relying on fossil fuels for powergeneration and it has to concentrate in the coming years to focus on non-conventionalmethod. The government has signed the nuclear deal in 2008 with USA to increase itproduction of energy through nuclear reactors, which are the most cleanest form of energy.However, the impediment in this sector is the high cost involved in erection and maintenanceof the installation of nuclear reactors and availability of nuclear fuel. In this front, the mostimportant development achieved is the co-operation being extended by almost all majornuclear fuel supply group of countries.

With the Indian government signing the nuclear deal with the US, the power sector is all setto witness an explosion in the coming years in the country.

Signs of this were clear when Prime Minister Manmohan Singh said the deal will help Indiatide over its energy crisis as the country needs a lot of investments in the energy sector.

India will need around $250 billion investments in the power sector over the next 8-9 years,according to a CII-AT Kearney Study on „sustaining growth: future of Indian power sector‟.

The Indian power market is evolving rapidly from a „nascent‟ market phase to a „developing‟phase. The power demand in the base case is expected to grow at a steady 7.5%-8% CAGRtill 2017. Further, the low “power penetration” levels indicate large demand. The powermarkets will have to achieve consistent high growth rates to bring per capita consumption tocomparable levels of some of the other developing countries like China and Brazil.

The emerging dynamics of the Indian power market would require industry players to realigntheir strategies and operating models to the changing sectoral trends. The focus would need to

4 The Future of Power Sector in Indiabe both on project execution as well as efficient operations, in line with the „growth‟characteristics of the sector.

A new era of power on power competition will emerge by 2014 that will bring in at least 80-85 GW of new capacity - 80- 90% of them thermal units targeting high PLF of 80-95% -reducing the base load deficit to a low of 1-2%. Accordingly, we expect pricing pressures inthe generation space and a 40-50% decline in average short term/merchant prices by 2014-15.

Wind energy will continue to grow at 15-20% pa with new opportunities in offshorecapacities and large capacity turbines. Government incentives will open up opportunities forsolar farms/distributed generation as well as PV manufacturing.

However, constrained fuel supplies present a major threat to the sector‟s growth: As percurrent trajectory, India, in spite of substantial reserves, is expected to confront a supplydeficit of 25% (250 MTPA) of domestic coal by 2014. Similarly, there will be a seven foldincrease in uranium requirement for meeting nuclear power ambitions of India.

Distribution, financing and manpower are other concerns that require immediate attention:High AT&C losses and slow rate of discom reforms will hurt the industry in the last mile.Financing may also present a challenge to industry growth. About $ 250 Bn investments willneed to be undertaken in the power sector in the next 8-9 years to fuel the planned growth.Similarly, over 150,000 additional skilled and semi skilled personnel required over the next 5- 7 years.

Some critical success factors for the industry are: Strengthen project management &execution capabilities, to ensure on-time, at cost execution. Secure fuel supplies through welldefined fuel sourcing plan especially coal (linkage, captive, imported) and its associatedcosts. Fuel logistics planning and implementation is also critical and should be a focus forproject leadership.

Realign market & customer strategy, by striking the right balance between long term PPAsand merchant trading. Reforms will also give rise to customer mix options (SEBs, traders,bulk buyers, etc), which will open up different possibilities. Alternate market facing modelslike power tolling, distributed generation, peaking power supplies should also be evaluated.

Develop Capital and Operational excellence through selection of right technology andsuppliers/manufacturers for the units. The asset availability and utilisation should bemaximized through O&M best practices.

Establish robust organizational enablers, across people - processes and systems. Manyorganisations will have to manage concurrent “projects” and “operations” stages. -Accordingly, a flexible organisation structure should to be designed and implemented.Overall, the report is cautiously “optimistic” about the Indian power sector and its ability tosupport India‟s growth aspirations.

Estimates by the Expert Committee on Integrated Energy Policy (Government of India

[2006a]), indicate that the national power requirement (in billions of units (Kwh) generated)will triple over the next 15 years.

5 The Future of Power Sector in IndiaIndia has the potential to show the fastest growth over the next 30 to 50 years. Growth ratecould be higher than 5 percent over the next 30 years and close to 5 percent as late as 2050 ifdevelopment proceeds successfully. Growth in capital stock together with growth in factorproductivity will yield output growth of 5.4 percent. Over the next 20 years, the working agepopulation is projected to grow at 1.9 percent per year. If educational attainment andparticipation rates remain unchanged, labor growth will contribute another 1.3 percent,yielding an aggregate growth rate of 6.7 percent per year, or a per capita growth rate of 5.3percent. This is a lower bound estimate and, even so, would be significantly greater than theper capita growth rate of 3.6 percent achieved in the 1980s and 1990s. Over a 40-year period,a 5.3 percent growth rate would increase the income of the average person nearly 8-fold.

Energy intensity of GDP, defined as the ratio of the energy consumption to the GDP, hasbeen observed to follow a certain trend worldwide. Below a certain level of development,growth results in increase in energy intensity. With further growth in economy, the energyintensity starts declining. Based on data by International Energy Agency , overall energyintensity of GDP in India is the same as in OECD countries, when GDP is calculated in termsof the purchasing power parity (PPP). Energy-GDP elasticity, the ratio of the growth rates ofthe two, remained around 1.3 from early fifties to mid-seventies. Since then it has beencontinuously decreasing. Electricity is the most important component of the primary energy.Electricity-GDP elasticity was 3.0 till the mid-sixties. It has also decreased since then.Reasons for these energy–economy elasticity changes are: demographic shifts from rural tourban areas, structural economic changes towards lighter industry, impressive growth ofservices, increased use of energy efficient devices, increased efficiency of conversionequipments and inter-fuel substitution with more efficient alternatives. Based on the CMIEdata , the average value of the Electricity-GDP elasticity during 1991-2000 has beencalculated to be 1.213 and that of the primary energy- GDP elasticity to be 0.907. Estimatingthe future GDP growth rates of India from the projections taking the primary energy intensityfall to be 1.2 percent per year , extrapolating the electricity intensity fall from past data till2022 and subsequently a constant fall of 1.2 percent year, the growth rates of the primaryenergy and electrical energy have been estimated as follows.

Period Primary Energy Electricity

Percent Annual Growth Percent Annual Growth

2002-2022 4.6 6.3

2022-2032 4.5 4.9

2032-2042 4.5 4.5

2042-2052 3.9 3.9

These rates are the basis of the projections reported. It may be recalled that historical primaryenergy and electricity growth rates during 1981- 2000 were 6 percent per year and 7.8 percentper year respectively.

Based on the growth rates given in the above table, per capita electricity generation wouldreach about 5300 kWh per year in the year 2052 and total about 8000 TWh. This would

6 The Future of Power Sector in Indiacorrespond to an installed capacity of around 1300 GWe. Annual primary energyconsumption would increase from about 13.5 EJ in 2002-03 to about 117 EJ in 2052-53. Bythen the cumulative energy expenditure will be about 2400 EJ.

2.The metrics for the Power sector:

Per Capita Consumption of Electricity

Per capita consumption of electricity is expected to rise to over 1000 kilowatt hours perannum (kwh/ annum) in next 10 years (from present level of 580 kwh). Compare this againstover 10,000 kwh/ annum in the developed countries!

Plant Load Factor (PLF)

The actual all India PLF of Thermal Utilities during April 03- March 04 was 72.7% asagainst the target of 72.0%.The Plant Load factor should be as high as possible.(AnnexureRoom for productivity improvement)

16th Electric Power Survey (EPS) projections

By the year 2012, India‟s peak demand would be 157,107 MW with energy requirement of975 BU. (Annexure Table 7: Source: Fig based on 17th Electric Power Survey (EPS))

Unbalanced Growth & Shortages

Along with this quantitative growth, the Indian electricity sector has also achieved qualitativegrowth. This is reflected in the advanced technological capabilities and large number ofhighly skilled personnel available in the country. While this must be appreciated, it must alsobe realized that the growth of the sector has not been balanced. The availability of power hasincreased but demand has consistently outstripped supply and substantial energy & peakshortages of 7.1% & 11.2% prevail in India. Coupled with this is the urban-rural dichotomyin supply- as per Census 2001, only about 56% of households have access to electricity, withthe rural access being 44% and urban access about 82%. In the case of those who do haveelectricity, reliability and quality are matters of great concern. The annual per capitaconsumption, at about 580 kWh is among the lowest in the world.

The Government of India has an ambitious mission of POWER FOR ALL BY 2012. Thismission would require that the installed generation capacity should be at least 200,000 MWby 2012 from the present level of 144,564.97 MW. Power requirement will double by 2020 to400,000MW.

3.1 Objectives

 Sufficient power to achieve GDP growth rate of 8%

 Reliable power  Quality power  Optimum power cost  Commercial viability of power industry  Power for all

3.2 Strategies

 Power Generation Strategy with focus on low cost generation, optimization of

 Conservation Strategy to optimise the utilization of electricity with focus on Demand

 Communication Strategy for political consensus with media support to enhance the genera; public awareness.

4. Sector Specific Opportunities:

4.1 Coal

�At 51%, Coal is the single-largest source of energy at the disposal of the power sector.(KPMG Report, November 2007)

8 The Future of Power Sector in India�By 2011– 12, demand for coal is expected to increase to 730 MMT p.a., creating a supplyshortage of over 50 MMT.

�India has the fourth largest proven coal reserves in the world, pegged at 96 billion tones,creating an investment opportunity of US$ 10 – 15 billion over the next 5 years. (InvestmentCommission of India)

4.2 Oil

�The demand for Oil – which is currently the second most important source of energy - isexpected to grow from 119 MTOE in 2004 to 250 MTOE in 2025 at an annual growth rate of3.6%.(India Brand Equity Foundation)

�However, domestic production for the corresponding period is expected to increase at

approximately 2.6% only. (India Brand Equity Foundation)

�As a result, our reliance on oil imports is likely to increase from its present level of 72% to90% by 2025. (Investment Commission of India)

�To combat this issue, the government has opened up the domestic oil sector for privateparticipation under the New Exploration Licensing Policy (NELP).

�Under the competitive bidding process prescribed under the NELP, investmentcommitments of US$ 8 billion towards oil exploration projects have already been received.Bidding for more such projects is currently in progress and is expected to result in furtherinvestment inflows into this sector.

4.3 Natural Gas

�India has vast reserves of natural gas. More than 700 billion cubic meters of natural gashave been discovered in the last decade alone. (KPMG Report, November 2007)

�Demand for Natural Gas is expected to grow at a CAGR of 12% over the next 5 years toreach 279 MMSCMD by 2012.

�The importance of natural gas as an energy source has witnessed a significant increase overthe past decade on account of the following two reasons:�Rising popularity of compressed natural gas (CNG) as an alternative source of automotivefuel;�Increased penetration through availability of “piped gas” at residences; and�Imminent depletion of traditional energy sources such as coal and oil.

4.4 Hydro Power

�With it intricate network of rivers, substantial opportunities for generation of hydro-power

exist in India.

�Only 22% of the 150 GW hydroelectric potential in the country has been harnessed so far.(Economic Times 2008)

9 The Future of Power Sector in India�Private participation will play a key role in meeting the target requirement of an additional45 GW over the next 10 years.

4.5 Wind Energy

�India is the 4th largest country in the world in terms of installed wind energy. (KPMGReport, November 2007)

�India‟s potential of wind power is pegged at 45,000 MW while its current capacity standsat only 7,660MW. (Economic Times 2008)

method on cost incurred on setting up of wind turbine generators have resulted in significantprivate investment in this area.

�It is estimated that 6,000 MW of additional wind power capacity will be installed in India by 2012.Wind power accounts for 6% of India's total installed power capacity, and it generates 1.6% of thecountry's power.

�The Ministry of New and Renewable Energy (MNRE) has fixed a target of 10,500 MW between2007-12, but an additional generation capacity of only about 6,000 MW might be available forcommercial use by 2012.

4.6 Solar Energy

�Despite the prevalence of an inherent advantage in the form of solar insulation, thepotential for solar energy is virtually untapped in India.

�India‟s installed solar – based capacity stands at a mere 100MW compared to its presentpotential of 50,000MW.

�Based on the substantial investment opportunities that exist in this sector, it is estimatedthat by 2031 – 32, solar power would be the single largest source of energy, contributing1,200 MTOE i.e. more than 30% of our total expected requirements. (India Brand EquityFoundation)

�High capital investment has kept solar power away from mass applications. However,capex has been steadily declining and is likely to touch $2 per watt by 2010 and,perhaps, hit $1.5 per watt by 2012 on account of high efficiency solar cells.By 2012, solar power could become more attractive than non-pithead coal and gas. Onlyhydro and nuclear will have lower delivered costs.

�In July 2009, India unveiled a $19 billion plan to produce 20 GW of solar power by2020.Under the plan, solar-powered equipment and applications would be mandatory in allgovernment buildings including hospitals and hotels.

10 The Future of Power Sector in India4.7 Nuclear Energy

�By 2032, the government plans to raise the contribution of nuclear energy from the currentlevel of less than 3% to around 10% of the country's installed capacity (Angel Brokingreport)

�The signing of the Indo – US nuclear deal has created significant opportunities for severalplayers across the entire power supply chain, with an estimated investment opportunity ofUS$ 10 billion over the next five years. (JP Morgan estimate)

�Further, India has among the world‟s largest reserves of alternative nuclear fuel – thorium.Accordingly, substantial investment opportunities are also likely to arise once commercialproduction based on thorium becomes feasible.

�When the Indo-US nuclear deal goes through, India is expected to generate an additional 25,000MW of nuclear power by 2020, bringing total estimated nuclear power generation to 45,000 MW.

Source: Powerline Magazine September 09

6.Forecast of sectorial electricity demand: Econometric models

Sectorial electrical energy demand can be represented by a logarithmic linear econometric

model i.e.,

ln Eti = ai + bi ln Ati+ci ln Lti+pi ln Pt+ eti

where Eti is the electricity consumption (GWh) of sector i in year t. The Ati representssectorial GDP (Rs.crore), i.e. agriculture, industry and service, for agricultural, industrial andother electrical energy sectors and GDP per capita (Rs.) for domestic, commercial andtransport sectors. The Lti represents sectorial electricity consumption in year t-1 foragricultural and industrial sectors and number of consumers for domestic, commercial and

11 The Future of Power Sector in Indiaother sectors. Pt represents price indices (1993-94=100) of electricity for agricultural,industrial, domestic, commercial and transport sectors. eti represents error or residual term ofsector i in year t. The coefficients ai, bi, ci and pi have to be estimated for respective sectorsby regression models.SPSS 14.0 has been used for regression by taking data from the year1970-71 to 2004-05(CMIE,2007)

The time series estimate of the various sector of GDP, number of consumers in varioussectors have been tested by using autoregressive time series methods and the result wascompared with the original time series and the result was pretty good. The statistics ofresidual i.e. autocorrelation function and partial autocorrelation function was given goodresults. While a number of statistics are reported, we have focused on two: MAPE (meanabsolute percentage error) and MaxAPE (maximum absolute percentage error). Absolutepercentage error is a measure of how much a dependent series varies from its model-predicted level and provides an indication of the uncertainty in the predictions. We havetested the various series for the MAPE and MaxAPE and the result shows the goodagreement with the theory.

The time series forecast of various sectors of GDP contribution are shown in Fig.2 up to2044-45. Since the data from 1970-71 to 2004-05 were used to forecast the time series andcompared with the original series they matched with great accuracy so the forecasted horizonin Fig 2 is also expected a good agreement with the actual electricity demand in future.Asfrom the figure we see that the service sector has largest value in 2005-06 as compared toother two sectors but in the Forecasted horizon after 20034-35 the industry sector becomeslargest component and shows faster growth as compared to other two sectors. It may bepossible that service sector experience recession after forecast horizon.

The time series forecasting of the natural logarithmic value of various consuming sector(number of consumers) is as shown in Fig.3.The same treatment have been repeated for thetime series forecasting as in Fig.2.The forecasted result shows the good agreement with theoriginal time series. As from the figure it is clear that the number of consumers in other sectorincreases rapidly as compared to commercial and domestic sectors.The number ofcommercial consumer curve has lowest slope. So in future number of commercial consumermay be stagnated.

The Fig.4 shows the time series projection of natural logarithmic value of GDP per capita andthe price indices of electricity. The forecast also shows the good agreement with the originaltime series. Price indices and GDP per capita increases with constant growth rate from 2005-06 to 2044-45. The correctness of the predicted data can be examined from the values ofstatistical parameters.The R2 and adjusted R2 value for all the sectors shows very highpredictive power of the developed models. The Durbin-Watson (D-W) statistics, which iswidely used for testing the serial correlation is estimated and shows very small positiveautocorrelation for some of the sectors and in some sectors almost absence of autocorrelation.The value of D-W statistics in agricultural sector, industrial sector and other sectors are 1.91,1.74 and 1.76 respectively which gives conclusive result for the absence of autocorrelation.The D-W statistics in commercial sector, domestic sector and transport sectors are 1.62, 1.4and 1.4 respectively which gives a moderate absence of autocorrelation. According toeconometric regression theory, if the residuals are not independent (or in other words theerrors are serially correlated), the use of the F-and t-tests and confidence

12 The Future of Power Sector in Indiaintervals is not strictly valid and the estimate of the coefficients may be unstable (Makridakiset al, 1998).The t-statistics also shows almost satisfactory result for each variable in allsectors.

Since we have used a logarithmic linear equation (5) to forecast sectorial electricitydemand,the coefficients directly measures the elasticity.As in Table 1 the coefficients inforecasting industrial sector demand are very small than one.So these are inelastic in nature.For agricultural sector the long term price elasticity is -1.04 and elasticity with respect toGDP contribution by agriculture is 2.06 which show a strong elastic behavior.All othersectors shows inelastic behavior except number of consumer in domestic sector where thelong term elasticity is 1.003.

The forecasted electricity demand using econometric model (using the equation) for varioussectors is shown in Fig.5.From the figure it is clear that the electricity demand by industrialsector is largest over the years and will be the dominating sector in the electricityconsumption. As per the time series of sectorial consumption of electricity agriculture sectorwas dominating sector before 2003-04 as compared to the domestic sector but after that thedomestic sector electric energy demand increases with high growth rate. The commercialsector electricity demand also shows substantial growth over time but less than in absolutewith respect to industrial, agricultural and domestic sector demand. The transport sector andother sector shows very slow growth in the forecasting horizon. The industrial sectorelectricity demand in base year 2004-05 was 138 billion kWh which increases to 588 billionkWh with an average growth rate of about 8%.The Agricultural and domestic sector electricconsumption were 89 and 96 billion kWh in year 2004-05 and increases up to 287 and 397billion kWh with an average growth of 6% and 8% respectively. So each sector consumeselectricity with different growth rate.

The curve shows a constant slope over the forecasted period. The total electricitydemand increases with an average growth rate of about 7% and becomes 1.52 PWh in 2044-45 which is four fold from 2004-05.

7. Conclusion

7.1 Power Sector SWOT Analysis

Strengths India has the fifth largest electricity generation capacity in the world Transmission & Distribution network of 6.6 million circuit km - the third largest in theworld Potential for growth in this sector (demand exceeding supply) Increasing focus on renewable sources of energy Government presence in the sector (encouraging entry of foreign players) No barriers to entry

Weaknesses Public sector players are only into generation of power Large demand-supply gap: All India average energy shortfall of 9% and peak demandshortfall

13 The Future of Power Sector in Indiaof 14% Lack of exposure of entrepreneurs to handle international contracts Inexperience of SEBs to handle changing market environment in addition to their weakfinancial condition Unavailability of fuel and unwillingness of fuel suppliers to enter into bankable contarcts Lack of necessary infrastructure to transport and store fuel, high cost risk involved intransporting fuel

Opportunities huge population base Opportunities in Generation Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each. Coal based plants at pithead or coastal locations which are untapped. Hydel power potential of 150,000 MW is untapped as assessed by the Government ofIndia. Renovation, modernisation, up-rating and life extension of old thermal and hydro powerplants.

Threats Competition to domestic players from foreign Pvt. players as 100% FDI permitted bygovernment in Generation, Transmission & Distribution Not a lucrative option for investors(ROE ) Rise in price of raw materials Tariffs are distorted and do not cover cost

Opportunities in Transmission network ventures - additional 60,000 circuitkm of Transmission network expected by 2012. Total investment opportunity of about US$ 150 billion over a 5 year. By end March 2008, India will achieve Commercial Operation Date (COD)on about 10,000 MW, marking the best first year in any Plan period. As per recent budget, Govt to will provide Rs.800 Crore for the PowerDevelopment and Reforms Project. Govt. propose to create a national fund for transmission and distributionreform in order to improve the poor state of transmission and distribution(T&D) that has been a drag on the sector. The fourth Ultra Mega Power Project (UMPP) at Tilaiya to be awardedshortly. Possibility of bring up five more UMPPs in Chhattisgarh, Karnataka,Maharashtra, Orissa and Tamilnadu. In Hydro projects, 77 schemes have been identified with a total of 33,000MW capacity additions.

8. Annexure:

14 The Future of Power Sector in India 15The Future of Power Sector in India 16The Future of Power Sector in India 17The Future of Power Sector in India 18The Future of Power Sector in India 1200